Henna Co. produces and sells two products, T and O. It manufactures these produc

Question

Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.

Compute the break-even point in dollar sales for each product. (round to whole dollar.)

Assume that the company expects sales of each product to decline to 33,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement as just shown with columns for each of the two products (assume a 32% tax rate). Also, assume that any loss before taxes yields a 32% tax savings.

Assume that the company expects sales of each product to increase to 64,000 units next year with no change in unit selling price. Prepare forecasted financial results for next year following the format of the contribution margin income statement shown with columns for each of the two products (assume a 32% tax rate).

If the sales greatly decrease, which product would experience a greater loss?

Describe some factors that might have created the different cost structures for these 2 products.

Henna Co. produces and sells two products, T and O. It manufactures these products in separate factories and markets them through different channels. They have no shared costs. This year, the company sold 50,000 units of each product. Sales and costs for each product follow.

Explanation / Answer

Calculation of the Break Even Point Break Even Point = Fixed Costs/ PV Ratio Product T PV Ratio= Contribution/ Sales 400000/2000000 0.2 Break Even = 125000/.20 625000 Break Even is $ 625000 Product O PV Ratio = 1750000/2000000 0.875 Break Even = 1475000/.875 1685714 The Break Even for Product O is $ 1685714 T Per Unit O Per Unit Sales 2000000 40 2000000 40 variable Costs 1600000 32 250000 5 Contribution 400000 8 1750000 35 Fixed Cost Now for 33000 units T O Sales 1320000 1320000 Variable costs 1056000 165000 Contribution 264000 1155000 Fixed Costs 125000 1475000 Income before Taxes 139000 -320000 Income Taxes 44480 Net Income 94520 Now 64000 T O Sales 2560000 2560000 Variable costs 2048000 320000 Contribution 512000 2240000 Fixed Costs 125000 1475000 Income before Taxes 387000 765000 Income Taxes 123840 244800 Net Income 263160 520200

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